Cool Hand Steve

Peter Schiff
May 2, 2006

Yesterday, in a turnaround
reminiscent of the 1960's film "Cool Hand Luke," the
bosses at Morgan Stanley finally succeeded in getting poor old
Stephen Roach's mind right. For years Mr. Roach had caused headaches
up and down Wall Street for his stubborn "failure to communicate"
the upbeat messages so vital to the investment trade. Instead
he was one of the most influential voices calling attention to
the dangers of America's lack of domestic savings and production,
growing current account imbalances, and reliance on asset-based
consumption. The more upbeat Stephen Roach now anticipates the
rosy "soft-landing." scenario.

What happened to cause him
to finally make lemonade from all those economic lemons? Why
the G-7 and the IMF finally acknowledged that global imbalances
represented a potential problem. So Stephen Roach does a complete
180 simply because a loose affiliation of government policy makers
reluctantly admitted the obvious? Since when does acknowledging
a problem imply its solution?

Lyndon Johnson declared war
on poverty in the 1960's and the last time I checked poverty
was still winning. I suppose the nail biting at Apollo 13 mission
control should have ended once Jim Lovell declared "Houston
we have a problem." According to Roach, there is no need
for Alcoholics Anonymous, as the meetings should all adjourn
immediately following the standard introductions, "Hello
my name is Uncle Sam and I'm an alcoholic (or more appropriately
spendaholic.)" Sure, admitting that one has a problem is
the first step in a long journey, but admission in and of itself
does not immediately imply its successful completion; especially
if one celebrates his first AA meeting by toasting it.

The most interesting aspect
of his fox-hole conversion is his timing. Never before has his
doomsday scenario been so close to unfolding or his bearishness
so close to vindication. With the dollar resuming its fall, foreign
central banks raising rates and seeking to diversify their reserves,
housing supply overwhelming demand, and gold and other commodity
prices soaring out of control, one would think Mr. Roach would
finally be in the enviable position of saying "I told you
so." Instead he has changed his tune, and now sings in near
perfect harmony with the Wall Street's "All Bulls Choir."

Not only are the economic imbalances
to which Stephen Roach repeatedly referenced still present, they
loom larger than ever. Rather than swallowing their medicine,
Americans continue choking on it. Roach can see this as clearly
as I can, making his new stance difficult to understand. For
my money Wall Street's most popular bear finally turning bullish
is as bearish an indicator as I have ever seen, and may go down
as the most ill-timed capitulation in market history.

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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
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Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.